Futures contract

Lore & Background

The first historically known creation and use of futures may have been Thales of Miletus with his purchase of olive presses before an expected bumper crop of olives. In the 1930s two-thirds of all futures was in wheat.

Reader's Guide

Futures contracts are significant because they provide a mechanism for mitigating price risk and enabling speculation. Their original use allows parties to fix prices or exchange rates in advance for future transactions, which is advantageous for hedging against unfavorable movements. They also offer opportunities for speculation: a trader predicting price direction can contract to buy or sell at a price that yields profit if correct, and such speculation can help distribute commodities over time—saving during surplus and selling during need. The introduction of financial futures in 1972, including currency futures, interest rate futures, and stock market index futures, expanded their role. Retail traders increasingly use futures alongside options to hedge, manage leverage, and scale entries in volatile markets. Even organ futures have been proposed to increase the supply of transplant organs. The futures exchange requires both parties to post margin—a performance bond—to guarantee the agreement, and positions are marked to market daily to mitigate default risk. The clearing house becomes buyer to each seller and seller to each buyer, enabling traders to transact without due diligence on counterparties. Margin requirements are set by the exchange and may be waived for hedgers with physical ownership or spread traders with offsetting positions.

Did You Know?

• The first historically known creation and use of futures may have been Thales of Miletus with his purchase of olive presses before an expected bumper crop of olives.
• In the 1930s two-thirds of all futures was in wheat.